Archive - Jul 2010

July 31st

Leo Kolivakis's picture

Alberta Investment Management Corp., known as AIMCo, said overall returns are running in the range of about 17% for 2009-2010. It's too bad AIMCo's CEO, Leo de Bever, still doesn't get the respect he deserves. Come read his thoughts on AIMCo, markets and why he is in no rush to invest more in infrastructure.

Discount Window Borrowings Plunge To Just $11 Million, Lowest Since 2007; And Other Observations On The Future Of Fed Liabilities

In all the recent hoopla over Excess Reserves and spurious rumors over whether or not they should generate any form of interest (readers will recall a key catalyst for a surge in the market two weeks ago was the expectedly false rumor that Bernanke would announce the elimination of any IOR (Interest Paid On Reserves) rather than keeping the even current minimal 0.25% rate), everyone seems to have forgotten that old staple: the Discount Window. And probably logically so: while the Excess Reserve issue is one that deals with excess liquidity in the banking system (by definition: otherwise it would be lent out to consumers), Discount Window-related concerns deal with the opposite, or a liquidity deficiency. Logically, the two are mutually exclusive: near record excess reserves held with Federal Reserve Banks simply means that banks are not in any want for money (of any term, but most specifically ultra-short term).Looking at the Fed's H.4.1 statement confirms that for the week ended July 29, the Fed's Primary Credit facility (aka the current version of the Discount Window, together with the Secondary Credit and the Seasonal Credit Facility) usage has plummeted to just $11 million: a negligible number for a "rescue facility" that at the peak of the crisis saw more than $100 billion in overnight borrowings. The finding is not surprising, when considering that the rate on the Primary Credit Facility is 0.75%. As this is higher than the rate on the 2 Year Treasury, there is very little banks can do in reinvesting capital that is more expensive than even long-term funding sources. In other words, with well over a trillion in Excess Reserves, banks are becoming increasingly self-funding, at least in the medium term, and seek to disintermediate themselves from the Fed. In looking at the same problem, but from the perspective of the IOR, the Atlanta Fed concludes: "One broad justification for an IOR policy is precisely
that it induces banks to hold quantities of excess reserves that are
large enough to mitigate the need for central banks to extend the
credit necessary to keep the payments system running efficiently. And,
of course, mitigating those needs also means mitigating the attendant
." An environment in which banks are increasingly leery of relying on the Fed for funding, irrespective of whether IOR at 0.00% or 0.25%, is not one in which consumer should expect to see any incremental lending any time soon.

14.7 Million (19%) Of US Mortgages Have $770 Billion In Underwater Equity, $2.4 Trillion In Total Debt Impaired

An excel spreadsheet released from a recent briefing by Mark Zandi and Robert Shiller is making the rounds within the blogosphere. It provides a useful compilation of the underwater equity statistics in the country. In a nutshell here are the observations:

  • 19%, or 14.748 million of the 77.570 million US households, are in negative equity
  • 30.6% of the 48.243 million of homeowners with first mortgages are in negative equity
  • 21.8% of the 67.578 million in owner-occupied single family homes are  in negative equity
  • 4.133 million of the 14.748 million of underwater homeowners are underwater by 50%+, meaning the owe more than 50% more than their homes are worth
    • Of the 50%+ underwater category, the worst states are California (672K), Florida (423K), and Texas (344K)
  • Total Negative Equity in the US is currently estimated at $771.1 billion
    • California mortgages have $234 billion in negative equity, Florida mortgages have $79 billion in negative equity, Texas mortgages have $48 billion in negative equity
  • $2.4 trillion in total mortgage debt is impaired due to negative equity

How Mark Zandi, who prepared this spreadsheet according to the meta data, could look at this data and come up with his recent paper in collaboration with Blinder, claiming that the recession is over, is simply beyond rationalization.

Ron Paul Goes After The SEC's FOIA Exclusivity, Introduces SEC Transparency Act

Just because being the most corrupt organization in the world was not enough, the SEC decided, courtesy of Donk (aka Frankendodd), that it is beyond accountability to anyone, even the constitution, after it was recently made public that the world's most incompetent and bribed regulators will continue watching kiddie porn, instead of regulatoring, only do so in complete opacity from now on, as in the future the SEC would be exempt from FOIA responses. And with retail investors saying "no more" to trading stocks in a rigged casino that shares the same level of integrity as its regulator, and is programmed to generate profits for the house and the computers on 99.9% of trades (except of course for those newsletter and subscription peddlers who catch every single inflection point ever, and can predict what the market will do not only tomorrow but a week, a month and a year from now) the market will soon be a ghost town. Recent attempts by Senator Kaufman to bring some honesty to stocks have so far been met with failure as theSisyphean task is far too great for any one individual. Which is why we are glad to learn that Ron Paul has joined those few who still hold the long-forgotten dream that the market should be fair and impartial for all (and yes, that means eliminating discount window access for the chosen few Bank Holding Company hedge funds out there) and has introduced the SEC Transparency Act of 2010 (HR 5970), a bill designed to force greater transparency in the Securities and Exchange Commission. Little by little, every single "intervention" by the world's two most corruptpoliticians is being overturned: first the rating agency accountability provision which nearly destroyed the shadow market with a complete lockup of all new ABS issuance, and now the SEC's exclusion from that simple concept known as "checks and balances." Soon FinReg will finally be exposed for the fraud it has been since its inception - the much touted Obama financial regulatory reform is nothing but a scam designed to allow Wall Street to steel what middle class wealth remains faster, bolder and in ever greater amounts, as the point where the system breaks is now months away, and the Wall Street-DC joint venture is all too aware. As a result all must be done to allow theft to be bigger than ever, all the while the "regulator" is no longer held responsible for looking the other way.

"It's Not A Market, It's An HFT 'Crop Circle' Crime Scene" - Further Evidence Of Quote Stuffing Manipulation By HFT

Recently we posted a required reading analysis by Nanex in which the market trading analytics firm presented irrefutable evidence of quote stuffing by HFT algorithms in tens of stocks, in which thousands of cancelled quotes would reappear each second with a definitive periodicity and regularity, around the time of the May 6 flash crash. Aside from the fact that it is illegal to indicate a quote without a trade intent, this form of quote stuffing is in fact manipulative when conducted by HFT repeaters in specific "shapes" as it actually moves the NBBO actively higher or lower, in cases pushing the bid/offer range up to 10% higher without even one trade ever having occurred, simply by masking a big block order which other algos interpret as bid interest and pull all offers progressively or step function higher (or vice versa, although we have rarely if ever seen the walking down of a stock over the past 18 months). It is as if the HFT lobby has been given the green light by the powers that be that it is safe to activate merely the bid-size quote stuffing algorithms, and not worry: the fact that the market is so one sided in its quote stuffing patterns is sufficient reason to worry of a concerted effort to push stocks higher, initiated from the very top, and effected by not only the Primary Dealer community but by the end-market "liquidity providers." Today, courtesy of Nanex we demonstrate that this type of illegal stock manipulation continues rampant to this very day, and the SEC still to fails acknowledge that it is precisely the HFT market participants that persist in destabilizing stock prices, which have given up responding to fundamentals and merely move up or down based on quote stuffing interventions by those who plead innocence and claim to only be providing liquidity. Well take a look at the millions in fake, and thus illegal, bids demonstrated below and tell us just how any of this manipulation is "providing liquidity" - the second the patterns break, the algos responsible for the churn pattern disappear, thus eliminating numerous levels of so called bid liquidity below the NBBO: break enough patterns and you have another flash crash as the market once again goes bidless.So while the SEC continues to pander merely to the interests of the market manipulation lobby, and is now doing it in more style than ever by refusing to answer to FOIA requests going forward, here is Nanex with yet more evidence that we no longer have a market, but merely a daily recurring crime scene.

July 30th

Nomura Sees Fed Issuing QE-Lite Statement On August 10

Just because "extended" and "exceptional" is so H1, 2010. With three brand new doves on the board of the Fed, it was only a matter of time before the printers realized that there is no reason why ZIRP should hold the central bank back, now that even hotdog vendors know all about the deleveraging double dip the US finds itself in. Up on deck we Nomura, which issued the first official change in a call for QE-Light. The firm's economists David Ressler and Zach Pandl, no doubt after consulting with Richard Koo, say, "we now expect the FOMC to 'ease' at the 10 August meeting. Exactly what form this easing might take is debatable. Our assumption is that they will change the language of the statement to signal that the balance sheet will remain expanded, and change policy around the MBS program to start reinvesting paydowns." It won't be the last. Should the Fed telegraph further easing, expect stocks to surge at least another 10% as the 10Y approaches 2.5% as nothing makes sense any more.

Bull/Bear Weekly Recap

A concise and objective summary of the week's bullish and bearish events

Leo Kolivakis's picture

In the first quarter, the US economy grew by 3.7%, revised up from an originally reported 2.7% increase. But growth estimates all the way back to the start of 2007 were revised lower. Moreover, the level of real GDP in Q1 was revised down by $100 billion. Does this mean the secular bull market in bonds will continue? And are Treasuries the "last diversifier left"?

Market Breaks As Stocks Explode To Celebrate Sub 2.9% 10 Year

The capital markets, which are celebrating accelerating deflation and inflation at the same time, are now officially insane, as the Dow has diverged from its credit implied fair value by about 170 points! This will all end in lots and lots of tears. We hope the computers enjoy trading with each other as much as all carbon based lifeforms relinquish the en masse abandonment of the stock market.

Naked Cramer - Annotation Day Four

Geoffrey Raymond's art, just like fine wine, only gets better with time. This is particularly true if the art is subjected to accelerated aging via repeated days of annotations. Raymond's latest piece: the Naked Cramer, is now on its day four of soliciting random and assorted commentary, and the prevailing sentiment on CNBC's permabullish stockpicker is certainly starting to shine through. The results are below.

Vitaliy Katsenelson's picture

The Japanese economy operates on the assumption, soon to be proved false, that the government will always be able to borrow at low interest rates. As internal demand evaporates, the government will have to start hawking its debt outside Japan — in a more realistic world, where interest rates are a lot higher.

Banks In Ninth District Blame Unwillingness To Lend On Obama Policies

The latest and most damning confirmation that it is none other than the president and his errant policies that are the primary cause for the credit crunch spreading among individuals and small and medium businesses like a paperborne version of the plague, comes direct from the Minneapolis Fed, where in a paper titled "Come and get it--please: Banks and credit unions say they have money to lend, but credit markets are still struggling for a variety of reasons" the Ninth Fed district puts the blame for the credit freeze flatly where it belongs: the president himself, and more specifically his destructive economic advisors. "The most-cited reasons—though only by a small margin—were
organizational uncertainty about future financial system reforms and
regulatory restrictions on bank lending. A Minnesota institution stated
flatly, “The regulatory environment has impacted our willingness to
make loans.
” And stunningly enough, the desire by an ever-greater portion of Americans to forgo future credit and to splurge on idiotic purchases like iPods even as they no longer pay their mortgage and destroy their credit rating is having repercussions. "Said a South Dakota institution, 'We have money to lend, but cannot
always fund applicants due to inability to borrow. Their poor credit
histories keep them from obtaining credit.'" Who would have thunk that while Wall Street is immune from the causal relationship between action and reaction, and in fact blowing itself (and being rescued by taxpayers) up leads to infinite creditability by the US government, the opposite is absolutely not true, as Americans are now less able than ever to procure loans from these very same bailed out banks